HOTELS

Laurence Geller

Changes, For Better or Worse
June 6, 2007

Slowly but surely the faces of our lodging industry owners are changing and sooner rather than later we will see fundamental differences in the way our industry is run.

The merger and acquisition trend that began earlier this year continued in April with Blackstone selling its extended-stay lodging portfolio to Lighthouse for US$8 billion; Highland Hospitality announcing it had accepted an offer to be acquired by JER Partners for US$2 billion; Eagle being acquired by Apollo for US$1.5 billion; and Accor selling the Red Roof Inn brand to a group of investors including Citigroup and Westbridge Hospitality Fund for US$1.32 billion. Now Legacy is being marketed and CNL Hotels & Resorts has disappeared. Equity Inns is conducting a “strategic review” and a more cynical person than I might think that some of the executives believe it is time to cash in rather than simply retire and let a new group of executives have their moment in the sun and help the company to new levels.

As the capital market liquidity increases, private equity funds build up, and demand for investment vehicles from foreign investors increase, we should expect to see more activity in the space. Lodging REITs trading at meaningful discounts to NAV continue to be attracting private money with the speed of summer lightning. The same trends are happening internationally with private funds fighting each other for portfolios of assets from Asia to Europe.

In the meantime, Orient Express Hotels is leaderless with the resignations of its CEO and CFO. Starwood is conducting a search for Steve Heyer’s replacement. Hilton just announced Matt Hart’s ascension to CEO and Steve Goldman took over as CEO of Sunstone. All of these companies attract rumors and attention as if they were merely tasty morsels for private equity. Of course none are for sale but as I get older I never cease to be amazed by events.

Fairmont and Four Seasons were taken private. Expect them to reemerge when the equity investors want to trigger their own promotes. Will they be public or private? Who knows?

As this wall of money stays available expect some companies to be sold—some for the right reason and some just for greed. What is the right reason? My own personal view is simple: If a company has no real strategic reason to exist, no clear story, no special niche, no unique selling proposition, then it probably should not exist. Take Highland, for example: What unique selling proposition was there? Yes, they were good managers of a mixed bag of assets. Is that enough to sustain through good and bad times? Management answered for us when they made their decision.

Extended Stay America—a real brand and great story. But Blackstone wanted to trigger its promote. So it is gone. Will it be broken up? Will it re-emerge from its temporary status? Time will tell.

Will Orient Express be gobbled up during the managerial hiatus? Will Starwood be irresistible to a wealthy fund as it searches for stability after Bartels, Sternlicht, Cotter and Heyer have all exited through a rapid revolving door?

Is InterContinental’s “asset light” strategy preparing it for a sale, or is management really entrenched and deep believers in their strategy?

My conclusion: More change ahead. With it comes opportunity. By the end of the cycle we will see what the opportunity was and whether it was for good or for bad.

Posted by Laurence Geller on June 6, 2007 | Comments (0)